When a Compensating Control Exists, a Deficiency in the System

question 19

Multiple Choice

When a compensating control exists, a deficiency in the system:

• A) is magnified and must be removed from the sampling process and examined in its entirety.
• B) could cause a material loss, so it must be tested using substantive procedures.
• C) is reduced but not removed; therefore, it is still of concern to the auditor.
• D) is no longer a concern because the potential for misstatement has been sufficiently reduced.

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Definitions:

Standardized Residual

The difference between the observed and predicted values, divided by the standard deviation of the residuals.

Standard Error

A statistic that measures the variability or precision of the sampling distribution of a statistic.

Autocorrelated

A characteristic of a series where subsequent observations in the series are correlated with one another.

Independent

Not influenced or controlled by others; having the freedom to act or function separately.